IMF and Central Bank
still looking for common path

Lazard reappointed by Ministry of Finance

The Governor of the Central Bank (BDL) Karim Souaid held a series of high-level meetings in Washington with the International Monetary Fund (IMF), to help break the deadlock in the financial reform process. This comes following the IMF’s most recent mission last May.

The meetings were marked by difficult exchanges with both sides seeking to co-align on the way forward. Discussions have focused primarily on governance and comprehensive banking sector restructuring. According to sources familiar with what happened, the meetings evolved from being contentious to constructive, with the objective of agreeing on a roadmap.

Souaid was invited by the IMF to an on-boarding workshop normally reserved for newly appointed central bank governors. In parallel, he met with various IMF officials, including Jihad Azour, Director of the Middle East and Central Asia Department, who has played a role in facilitating the dialogue and allowing for open exchanges despite initial disagreements over the sequencing of reforms and legislative responsibility.

The governor was accompanied by Salim Chahine, BDL’s third Vice-Governor whose term has just expired. He attended in his capacity of consultant.

A key sticking point was the role of the Central Bank in shaping the roadmap for reform. The IMF maintained that BDL should propose a restructuring framework, with the Fund offering technical support. Souaid stressed on the Central Bank’s institutional independence, emphasizing that it should not be a negotiating party in matters currently under discussion between the IMF and the government.

Souaid informed the IMF that BDL will commission a consultancy firm to provide Sovereign Advisory Services on bank reform and restructuring. The firm will help develop a detailed roadmap for banking sector reform that will ultimately form the basis for further discussions with stakeholders, including the IMF. This firm would work on a roadmap that begins with policy recommendations and ends with a framework for negotiations involving the three main stakeholders: the State, Central Bank, and commercial banks. The final product would ideally be submitted by the government as a draft law to Parliament for ratification and implementation.

The IMF’s mission concluded in May involved discussions with the authorities on a comprehensive economic reform program. The IMF said that bank restructuring remains a critical priority to restore the sector’s health, move away from the cash-based economy, restart credit to the private-sector, and protect depositors to the maximum extent possible. “Given Lebanon’s substantial reconstruction needs, limited fiscal space, and lack of capacity to borrow, the country will require significant support from external partners on highly concessional terms,” said the IMF at the time.

In parallel, the government has revived its engagement with international advisory firm Lazard, which had worked on debt and restructuring issues in 2020. It is not clear whether Lazard will handle both Eurobond-related external debt and domestic banking sector restructuring, or only one of the two.